Unit 3.1 - Sources of finance

Question 1

Capital expenditure

Answer 1

Investment spending on fixed assets such as the purchase of land and buildings

Question 2

Revenue expenditure

Answer 2

Spending on the day-to-day

running of a business, such as rent, wages and utility bills

Question 3

Sources of finance

Answer 3

General term used to refer to where or how businesses obtain their funds, such as from personal funds, retained profits, loans and government grants

Question 4

Internal sources of finance

Answer 4

Getting funds from within
the organization
(e.g. through personal funds, retained profits and the sale of assets)

Question 5

Personal funds (ISF)

Answer 5

• The use of an entrepreneur’s own savings

- Personal funds are usually used to finance business start-ups

Question 6

Retained profit (ISF)

Answer 6

The value of surplus that the business keeps to use within the business after paying corporate taxes on its profits to the government and dividends to its shareholders

Question 7

External sources of finance

Answer 7

Getting funds from outside the organisation

e.g. through debt (overdrafts, loans and debentures), share capital, or the government

Question 8

Sale of assets (ISF)

Answer 8

Selling dormant assets such as old machinery that have been replaced

Question 9

Share capital (ESF)

Answer 9

The money raised from selling shares in a limited liability company, from its initial public offering (IPO)
and any subsequent share issues

Question 10

Initial public offering (IPO)

Answer 10

A business converting its

legal status to a public limited company by floating (selling) its shares on a stock exchange for the first time

Question 11

Loan capital (/debt capital)

Answer 11

Medium to long-term sources of interest-bearing finance obtained from commercial lenders. Examples include mortgages, business development loans and debentures

Question 12

Overdrafts (ESF)

Answer 12

• Allow a business to spend in excess of the amount in its bank account, up to a predetermined limit
• Most flexible form of borrowing in the short term.

Question 13

Trade credit (ESF)

Answer 13

• Allows a business to buy now and pay later

- The credit provider does not receive any cash from the buyer until a later date (usually allow between 30-60 days).

Question 14

Grants (ESF)

Answer 14

• Government financial gifts to support business
  activities
• Aren’t expected to be repaid by the recipient.

Question 15

Subsidies (ESF)

Answer 15

Funded by the government to lower a firm’s production costs as out put provides extended benefits to society
(e.g. farmers are often provided with subsidies to stabilise food prices)

Question 16

Debt factoring (ESF)

Answer 16

A financial service whereby a factor (such a bank) collects debts on behalf of other businesses, in return for a fee

Question 17

Leasing (ESF)

Answer 17

• A form of hiring whereby a contract is agreed between a leasing company (the lessor) and the customer (the lessee)
• The lessee pays rental income to hire assets from the lessor, who is the legal owner of the assets

Question 18

Venture capital (ESF)

Answer 18

• High-risk capital invested by venture capital firms, usually at the start of a business idea
• The finance is usually in the form of loans and/or shares in the business venture

Question 19

Business angels (ESF)

Answer 19

Wealthy entrepreneurs who risk their own money by investing in small to medium-sized businesses that have high growth potential

Question 20

Sale-and-leaseback (ESF)

Answer 20

• Involves a business selling a fixed asset (such as its computer systems or a building) but immediately leasing the asset back
• In essence, the lessee transfers ownership to the lessor but the asset does not physically leave the business

Question 21

Short-term finance

Answer 21

Sources of finance needed for the day-to-day running of a business
(i.e, revenue expenditure)

Question 22

Medium-term finance

Answer 22

Sources of finance of one to five years in duration, used mainly to pay for fixed assets (i.e. capital expenditure)

Question 23

Long-term finance

Answer 23

Sources of finance of more than five years, used for the purchase of fixed assets or to finance the expansion of a business

Question 24

Share issue (/share placement)

Answer 24

Exists when an existing public limited company raises further finance by selling more of its shares

Question 25

Stock exchange

Answer 25

A highly regulated marketplace where

individuals and businesses can buy and/or sell shares in public limited companies (joint stock companies)